The truth is in the cash flow

From Xero to a Billion in How Long – Part 2

Posted by on May 4, 2018 in Growing with Confidence

From Xero to a Billion in How Long – Part 2

When we last met, we’d determined that you needed 1,795,000 new subscribers to reach your target 2.9 million subscribers which, based on your current Smoothed ARPU of $343, will generate $1bn in annual Revenue.

In Part 2, we’ll look at how quickly, and what it’ll cost, for you to achieve this outcome.

We’ll be balancing a matrix of key business drivers to achieve the best outcome for your business:

  • Market Share and the need to grab it as quickly as you can.
  • The risk of new technology rendering your business obsolete.
  • Sticky subscribers will underwrite your profit.
  • Shareholders with deep pockets to fund growth.

Let’s start with taking a look at your current growth rate. The graph below shows the growth in subscribers on a 6 monthly basis.

It is clear from this graph that the rate of growth in subscriber numbers dropped significantly in the 6 month period between March 2017 and September 2017.  We’ll need to reverse this as quickly as possible.

What happens if you increase Average Revenue Per User (ARPU)?

Building on the work already done, let’s take a look at what happens if you increase the subscription payable for using your software.

First though, we’ll start with the position if we do nothing.

The graph below shows the nexus between the compound rate of growth and time needed to reach your target of 2.9 million subscribers.

It assumes there is no change to the Smoothed ARPU of $343 as at September 2017.

It’s a Speed graph, which tells you the compound growth rate needed to reach 2.9 million subscribers in a specified number of years – for example, if you grow your annual subscribers at a compound rate of 21%pa it will take 5 years to reach your target number of subscribers.

Ok then, now what happens if we increase the Smoothed ARPU?

The graph below shows the different outcomes from increasing Smoothed ARPU by 5%pa, 7.5%pa and 10%pa for each year over a 5 year time horizon.

As you can see, a 5%pa increase in Smoothed ARPU speeds up by a year (from 5 to 4) the time needed to reach your target (at 21%pa growth in subscribers, the same rate as the base case).

Conversely, a 7.5%pa increase in Smoothed ARPU speeds up by two years the time needed to reach your target (at 22%pa growth in subscribers). If you can get a 10%pa increase in Smoothed ARPU then you can reach your target in 3 years at 17%pa growth in subscribers.

So, we can see that increasing ARPU every year has a material impact on speed.  But, how realistic is a 7.5%pa or 10%pa increase in Smoothed ARPU? Well, the average increase since 2013 has been about 5%, when they are made.

We know that a key driver of your business is happy (and sticky) customers. Churn, which is what happens when you lose a customer, is like a slap in the face to your growth plans.  It takes momentum away.

It seems to me that without a step change in your offering, there’s a real risk of higher churn if you increase subscriptions by more than what you’ve conditioned your customers to expect. I think 5%pa is possible but not 7.5%pa or 10%pa.

What about Investing for Growth?

The alternative then, is investing in the resources you need for growth.  In your case, this means hiring more people to drive your growth and investing in Marketing.

Staff Costs and Marketing are two of the major costs in your business. If we can work out targets for these, then along with the Revenue and Subscriber targets, we’ll have a good chunk of your future profit and loss statement worked out.

Let’s take a look at the recent trend in these costs.

The first graph looks at Staff Costs to Revenue.  You can see in the graph below that Staff Costs have fluctuated between 68% and 104% of Revenue.  Considering the drop in subscriber growth in the September half, I am going to invest in new employees to drive growth, but will set a cap of 80% of forecast Revenue as the maximum investment in any given year.

The next graph looks at Marketing Costs relative to Revenue:

You can see that Marketing Cost has fluctuated between 15% and 27% of Revenue. In this case, I am going to use 20% of forecast Revenue as the cap for the maximum amount I will spend on Marketing in any one year.

Ok, having established some guidelines, we need to turn out mind to the number of staff you’ll need to support your growth ambitions.  And then we’ll need to runs a cross check on the cost of these employees to the business.

Let’s take a look at some employee related statistics.  We’ll begin with the trend in Subscribers per Employee.

At September 17, you had 1,853 employees in total, representing 1 employee for every 604 subscribers.  You can see that even as employee numbers have increased, so too has the number of subscribers per employee.  In other words, since 2013, there has been a trend of increasing efficiency.

What about Revenue per Employee?  Here is the graph:

So, just like Subscriber/Employee there is an increasing trend in Revenue/Employee.

Ok, we can use this information to help understand the number of employees we need to support 2.9 million subscribers, or the number of employees we need to generate $1bn in Revenue. You’ll see the outcome in the two graphs below:

Right then, if each employee can support 604 subscribers then you will need 4,825 employees to support 2.9 million subscribers.

Similarly, if each employee helps your business generate $183k of Revenue then you will need 5,451 employees to generate $1bn in Revenue.

By now I reckon you’re asking yourself the “How much will this cost” question.  Let’s find out, shall we?

We can see from this that average Salary per employee was $125k at September, and had been consistently around that level since FY16.

If we bring this information together we get the following graphs:

So, now we have both trends over time and a range of that covers employee numbers required to support either $1bn in Revenue or 2.9 million in Subscribers and what it will cost to employee this number of people based on the current average Salary in your business.

But, which do we use.

Well, remember in Part 1 we discussed that until growth stops it is very hard to get a true picture of your actual ARPU.

The same issue applies with Revenue per Employee.

So, I think Revenue per Employee at Sept 17 is understated because of growth, and hence, the number of employees needed to support $1bn in Revenue overstates the actual requirement.

For that reason, I would prefer to use the number of employees needed to support 2.9 million subscribers as my benchmark – 4,825 employees.

I still think this will be more than we need, because we’ll be targeting a greater proportion of employees to drive and support growth in subscriptions, but not head office employees engaged in Company admin and support services.

So, let’s call the target 4,250 employees, an increase of ~2,400 from present levels.  When we apply the current average salary of $125k the total cost is about $530m, about $300m more than your current cost.

Bringing it all Together

I thinks it time to summarise this conversation and work out where we’re at and what we want to measure.

The things we measure are not absolutes, but they are drivers of growth that we can check at any time and use as guides as to how we’re going.

I think we need to set the following goals:

  • Subscriber growth of 15%pa in FY18, which is on the low side.
  • This reflects the slow down in subscriber growth experienced in the September 17 half-year.
  • To compensate for FY18, a higher growth rate of 25%pa in subscribers in FY19, FY20 and FY21.
  • Increasing ARPU each year has a material impact on the speed at which you can reach your goal.
  • For that reason, I will be forecasting an annual increase in Smoothed ARPU of 5%pa.
  • Total employees of 4,250 to be reached by the end of FY20 (ie: over a 2.5 year time frame).
  • We will add 800 by the end of FY18 and then another 800 in each of FY19 and FY20.
  • A cap on Staff Cost, set at 80% of Revenue.
  • A cap on Marketing Cost, set at 20% of Revenue.

What will this Cost?

Using these goals as my guide, I have built a three-way financial model to work out the funding needed to support this growth.  The key details are set out below, but for now, the main things that stand out are:

  • You need $250m in new equity to fund this growth.
  • By the end of FY21 you will have 2.3m subscribers, generating $969m of Revenue.
  • Both Staff Costs and Marketing Costs are well within the caps we established.
  • But, Revenue/Employee and Subscribers/Employee are either flat or go backwards.
  • Perhaps we can achieve this growth with fewer additional staff than originally thought.

The main driver of these different outcomes is the impact of increasing Smoothed ARPU by 5%pa. It means you need less subscribers than initially thought to get you to your $1bn target and, as a consequence, less additional employees than additionally thought to support that growth in subscribers.

So, let’s now look at what happens if we can reduce the number of additional employees, and move our Subscriber per Employee back to around the 600 mark more quickly than under the base case. Again, the details are set out in the dashboard below, but the main outcomes, compared to the base forecast, are:

  • Your business is profitable a year earlier, by the end of FY20.
  • You generate a cash flow surplus a year earlier, also by the end of FY20.
  • This reflects lower Staff Costs, driven by lower staff numbers.
  • Subscribers/Employee trend up from the FY18 low, but do not exceed the 600 level again until FY21.
  • Consequently, the equity funding you need has reduced to $100m.

The power of this analysis is that it makes crystal clear that the key drivers of your business is ARPU, Subscriber Growth, Subscriber Numbers and achieving an efficient Subscribers per Employee outcome. As the business owner, you now have a road-map you can use to easily keep track of how your business is performing.

In addition, you also know the levels of each that you need to reach and the time-frame to achieve those goals.

Well, it’s been a long meeting, and we’ll wrap it up here. But, when next we meet, in Part 3, we’ll look at some of the risks in your business, how these could derail your growth plans and what you can do to reduce these risks.

From Xero to a Billion in How Long – Part 1

Posted by on Apr 20, 2018 in Growing with Confidence

From Xero to a Billion in How Long – Part 1

This blog is an invitation for you to come on a journey with me.

On this journey, you need to imagine that you are the owner of a business called Xero.  You’re on a high growth path and you’ve just employed me as your virtual CFO.  In your last financial year your revenue was $290m.  The 12-month revenue run-rate at Sept 2017 is ~$340m and your plan is to triple this revenue to $1bn.  You’ve just reached break-even on your earnings.

What follows is an example of how I’d go about helping you.

Setting the Scene

Ok then, the first thing I do as your virtual CFO is talk with you about your business. I want to understand the qualitative factors that drive it.  From that discussion I will distil the key drivers of it. I do this even before looking at the numbers.

Here’s what those discussions reveal:

  • Xero is a fast-growing software as a service business. You build and sell accounting software.
  • Technology has a notoriously short life-cycle.
  • Software as a Service is a winner take all game. Market share is vital. Grab it as quickly as possible.
  • But growth at great speed is expensive and you need shareholders with deep pockets to fund you.
  • Your future profitability is dependent on happy, and hence, sticky customers.
  • You sell your software globally, with major markets in Australia, NZ, the UK and USA.
  • Your find the end-user of your software primarily through accountants and bookkeepers.

Market Share

Right then, the first thing I am going to do is a little bit of work on your market share.  To reach your goal of $1bn of Revenue you can either increase subscriber numbers, increase subscriptions or do a combination of both.  Understanding which options are feasible requires an understanding of your market position.

So, let’s look at how things stack up for this business of yours.

In the graph above we have your major markets, ranked on the vertical axis in terms of number of subscribers whilst the bubble is a measure of the relative size of each of those markets.  The market size info (in blue) has come from various government sources in those countries.

We can see that your business has its highest number of subscribers in Australia, the 3rd largest of its markets. At 23%, you hold a strong share of market.

Its second highest number of subscribers is in NZ, the smallest of its markets. At 51%, you have a dominant share of market.

Its third highest number of subscribers is in the UK, the second largest of its markets. At 4.6%, you hold a niche position.

Its smallest number of subscribers is in the US, the largest of its markets. At 0.4% market share, you only just have a beachhead.

The initial conclusion I draw from this, is to meet your goal of $1bn in Revenue, growth in subscriber numbers needs to come from Australia (to a dominant position), UK (to a strong position) and the US (to a niche position).  I would suggest that you need to increase your subscriber numbers to over 1,000,000 in each of those markets.  This would bring your business to a dominant position (near half) in Australia, a strong position (20%) in UK and a niche position in the US (5%).

In round terms this means another 500,000 subscribers in Australia, 750,000 in the UK and 900,000 in the USA for a total of 2,150,000 additional subscribers.

But will this be enough subscribers to meet your Goal?

Naturally, like all successful business owners, you have a strong sense of curiosity…also, you just want to test out whether I have thought through the 2,150,000 number I’ve just lobbed on you.  The following discussion ensues:

You already know that your subscriber numbers were 1,119,000 at September 2017.  You also know that these subscribers were paying you $31 per month in subscription revenue, for an annual amount of $373 of subscription revenue per user.  You call this Forward Looking Average Revenue per User or Forward Looking ARPU.

But, when I look at your most recent 12 months of Revenue ($340m at 30 Sept 2017) and the subscriber numbers at that time of 1,119,000 I get an Average Revenue per User (ARPU) of $304, well short of the $373 outlined above. Looking back in time we see a trend of ARPU underperforming Forward Looking ARPU as shown in the graph below.

Although ARPU is always less than the Forward Looking ARPU on this graph, the gap is shrinking, from 75% of Forward Looking ARPU at the end of FY13 to 89% of Forward Looking ARPU for the 12 months to Sept 2017.

I suspect this phenomenon reflects the pace of growth of your business.  Whenever you’re growing, ARPU will always lag the Forward Looking ARPU.  It reflects that a full 12 months of Revenue from each subscriber is required before you can get a proper read on ARPU and you will never get that outcome whilst growing.

To test this premise, I look at the growth in Subscriber numbers.  Here’s what that looks like:

As the business gets bigger, the rate of growth in percentage terms, slows and that is what we’re seeing the graph above.  If we bring these two previous charts together we get the chart below:

It’s clear that as the growth rate in subscriber numbers slow that ARPU moves closer to Forward Looking ARPU, but at 89% of Forward Looking ARPU it’s not close enough to be useful yet.

Now, if rate of growth is the issue creating the gap between ARPU and Forward Looking ARPU then what happens if I smooth that rate of growth? I’ll do this by using the average of Subscriber numbers over the course of the year as my denominator for working out ARPU, instead of the year-end Subscriber numbers.  I’ll call this new measure Smoothed ARPU.  The graph below shows its correlation to Forward Looking ARPU.

This approach yields a much closer match and will be usable for forecasting.  So, using Smoothed ARPU, I can now derive the number of subscribers required to reach $1bn in Revenue at different points in time, as set out in the graph below:

Righto then, in round figures, your business needs 2,914,000 subscribers based on the Sept 2017 Smoothed ARPU to meet the goal of $1bn in Revenue.  This is an increase of 1,795,000 million subscribers from the September 2017 position.  It also confirms that if you reach the Market Share and Subscriber Number goals then you should also meet your $1bn Revenue goal.

This is the end of Part 1.  In Part 2, I will look at how quickly you can reach your growth target if you continue to yield a Smoothed ARPU of $304.  I then look at how this timeframe is affected by increasing your ARPU or, alternatively by investing in additional resources to support your growth ambitions.  I’ll also compare the cashflow consequences of following each of these paths.

The Value of a Virtual CFO

Posted by on Jan 23, 2018 in Working Capital

The Value of a Virtual CFO

Last week, I was talking to Bankwest about working capital management.

Most readers will know by now that working capital is a particular interest of mine.

This is because working capital is the biggest single use of a trading business’ cashflow.

So, by efficiently managing working capital, a business owner will release cash.

Cash that can be used to fund growth.

Cash that can be used to give you, the owner, more control of your business.

Cash that can be used to pay a dividend.

A Virtual CFO is a uniquely cost-effective and flexible resource available to business owners interested in being more self-sufficient, confident about taking a risk and building a sustainable business.

My job is not to tell what to do, or even what not to do.

My job is to help you understand the likely financial outcome of your business choices.

I am your partner, not your keeper.

If you are wondering about the value a Virtual CFO can bring to your business then take a read of the conversation I had with Bankwest – there are some great tips on managing working capital that you can implement straight away.

If you’d like more individualised help, please contact me.

But t’was a famous Victory!

Posted by on Nov 1, 2017 in Leadership, Lessons from the Big End of Town

But t’was a famous Victory!

This is an article I wrote about CPA Australia on behalf of the Association of Virtual CFOs, and which was published by Smart Company.

I had watched with horrified fascination as CPA Australia tore itself apart over the last 12 months, egged on the by the Australian Financial Review.

Emotion had clearly over-whelmed reason, and in this article, I wanted to take an impartial look at what was happening.

The conclusions I came to were quite startling.

Financially, on a per member basis (itself a contentious subject) there was very little difference between CPA Australia and its major rival, CAANZ.

Yet, there was so much heat and noise from a dissident group of CPA members about how money was being spent.

And, when the dissident group “won”, they were not prepared. There was no plan, no clear idea as to the changes they wanted.

I think CPA Australia will rue the last 12 months for the next 12 to 24 months.

They will lose existing members, and if it is more than 7,500 then in all likelihood they will make a loss.

Fewer new members will join because of the damage to CPA’s reputation.

It will take time for the new board to take control, appoint a new CEO and in the meantime, the organisation will drift.

So, what are the lessons for business owners from CPA Australia’s implosion. Here are a few:

  1. Make considered, not emotional decisions.
  2. Before embarking on a course of actions have a plan.
  3. In fact, before embarking on a course of action, have several plans – Plan A, Plan B, Plan C etc.
  4. Never take your customer for granted. If you do, you invite disruption, like Uber and Taxis.
  5. Recognise that every threat is an opportunity – sometimes you need imagination to do this.

I hope you enjoy reading this article. It is fair to say that it was the one that received the most feedback and discussion when it was published.

If you think that impartial and thoughtful advice could help you take your business to the next level then please make Contact.

I can help.

T’was a famous Victory!


The Consequences of Choice

Posted by on Oct 30, 2017 in Leadership, Lessons from the Big End of Town

The Consequences of Choice

This is the third, and for the moment, final piece that I wrote on the subject of Murray Goulburn, on behalf of the Association of Virtual CFOs and published by Smart Company.

In it readers will discover how the problem of a budget with no basis in reality was compounded by a decision to make the most important stakeholder (their farmer suppliers) bear the brunt of that problem by unilaterally cutting their milk prices.

The consequence of these choices were:

  1. A collapse in Murray Goulburn’s milk supply as farmers left the industry or moved to another processor.
  2. A blow out in the cost of production as a consequence, impacting on Murray Goulburn’s competitiveness.
  3. Closure of three surplus milk factories.
  4. A loss of 360 jobs.
  5. Unwinding Murray Goulburn’s attempted clawback of milk payments and recognising it as an expense.
  6. Write downs of $410m, weakening Murray Goulburn’s financial position.

Business owners who read this case study will discover many lessons. Among them:

  1. In a crisis, work out which stakeholders are most important to the survival and recovery of your business.
  2. In a crisis, acknowledge your mistakes honestly/identify the core issue accurately.
  3. Formulate a plan to address the now accurately identified issues.
  4. Go to most important of those stakeholders with your plan and get their agreement to it.
  5. Move on to your next most important stakeholder with that plan and support in place.
  6. Recognise a crisis for what it also is – a chance to make needed changes to your business.
  7. Understand the key drivers of your business. The less you can control, the less risk you can take.

A Virtual CFO can help you with impartial and objective advice.

Unlike your external accountant, we work with you and your business regularly. We’ll help you make better, more informed choices.

If you’d like to find out how we can help, please Contact Us.

The Consequences of Choices


The Perils of Serving Two Masters

Posted by on Oct 26, 2017 in Lessons from the Big End of Town, Using Information as a source of Competitive Advantage

The Perils of Serving Two Masters

This is the second article I wrote on Murray Goulburn, on behalf of the Association of Virtual CFOs and published by Smart Company.

The background to this piece was an announcement of a full year profit for FY16 by Murray Goulburn.

At face value, this was a most unexpected outcome.

Remember, this was a business under so much pressure that it had slashed payments to its suppliers just a few month earlier.

Intrigued, I took a closer look at the Murray Goulburn result. The “devil in the detail” revealed some interesting pieces of “accounting magic”.

The main lesson for owners of small and medium size businesses is that your financial information is a source of competitive advantage.

When used properly, and with the right degree of granularity, your financials will tell you:

  1. Which aspects of your business are performing well.
  2. Which aspects are performing below expectations.
  3. Where to focus your attention to improve profitability and cash flow.
  4. The order in which to apply that focus.

If you’re not using your financial information to make informed decisions, or if you don’t know how to use your information in this manner, then please Contact Us.

We can help you.

The Perils of Serving Two Masters

Vaulting Ambition

Posted by on Oct 24, 2017 in Budgeting and Forecasting, Growing with Confidence, Lessons from the Big End of Town

Vaulting Ambition

This is the first of a series of articles I wrote about Murray Goulburn on behalf of the Association of Virtual CFOs and which were published by Smart Company.

At the time I was astounded by the scale of Murray Goulburn’s miss, and their subsequent decision to make the farmer suppliers wear the brunt of what was a monumental head office stuff up.

I also knew there would be a lot more to come on this story.

In the end, I wrote another couple of articles/blogs dealing with different aspects and lessons as the story unfolded.

For business owners, in this article, you will learn how to:

  1. Construct a robust budget.
  2. Use as your starting point your current position, key industry and economic drivers.
  3. Gauge the scale of the task to shift from your current to your planned position.
  4. Track key business drivers throughout the year to understand the likelihood of meeting budget.
  5. Decide when your budget needs to be revised.

The key lesson is that the point of a forecast is not to be “right”.

The point of a forecast is to reflect your business plan, so that when things don’t go as expected you can ask the following questions:

  1. Have we taken all the actions required by our business plan to achieve our forecast?
  2. If not, why not? When will those actions be completed?
  3. If we have, then what has changed in the market for our goods/services that we did not anticipate?
  4. What, if any, action do we need to take as a result of the answers to these questions?

To grow with confidence you need a good forecast.

The three-way financial models that we build at Pro Veritate will help you understand the timing and amount of capital needed by your business to support your plan.

If you are a growing business you should Contact Us.  We can help.

Vaulting Ambition

When Vanity meets Reality

Posted by on Oct 19, 2017 in Growing with Confidence, Lessons from the Big End of Town

When Vanity meets Reality

In this article, written for Smart Company on behalf of the Association of Virtual CFOs I look at the lessons for owners of small and medium size business from Slater and Gordon’s spectacular growth and subsequent bust.

You’ll discover how tricky and expensive growth can be.

There’s a practical illustration on how to use your balance sheet to track the flow of funds through your business.

It’s a must-know technique for any owner of a small or medium size business wanting to grow their business with confidence.

I hope you enjoy the article, but more importantly, find it useful and illuminating.

If you are planning to grow your business, and would like to be confident that you’re on the right track, then please make contact.

I can help.

When Vanity meets Reality

Until the Pips Squeak

Posted by on Oct 16, 2017 in Drivers of Cash Flow, Working Capital

Until the Pips Squeak

This is the first article that I wrote on behalf of the Association of Virtual CFOs back in March 2016 and which was subsequently published by Smart Company.

It quantifies the amount of money Woolworths would inject into their cash flow by extending the time taken to pay their suppliers.

For business owners, this article is a great introduction to the importance of managing your working capital.

If you’re a business owner making a profit but feeling like you have no cash then the chances are your cash is being tied up in your working capital.

I hope you enjoy the article, and more importantly, find it useful and illuminating.

Lastly, if you’d like to turn your financial information into a source of competitive advantage, and grow your business with confidence, then please do make contact…I can make a difference.

Until the Pips Squeak.

It’s the Vibe (On Overtrading) – Part 3

Posted by on Apr 28, 2014 in Academic Research, Budgeting and Forecasting, Working Capital

It’s the Vibe (On Overtrading) – Part 3

In this final instalment on Overtrading I will look at the actions a business owner can take to remedy overtrading.

Have a Plan

Growth doesn’t happen by itself. There is activity that you, the business owner, is planning to follow in order to generate growth.

As such, you have the opportunity to plan at the outset for the resources you need to support your growth ambitions – be it more people, more equipment, more space or more cash.

You need to prepare a budget that identifies the expected financial impacts of your growth plan on your profitability, balance sheet and cash flow.

By having a plan and a budget you have operational and financial reference points against which to track your actual progress. It will quickly become apparent whether you are growing quicker or slower than expected and whether the actual operational and financial impacts are within or outside expectations. This frame of reference will help you decide what changes you need to make to your plan and the required resources to support the revised plan.

If you haven’t planned, and find yourself in an overtrading situation, then these are the steps you need to take:

Self Help First

Firstly, you need to stay on top of your working capital.

This means being disciplined with invoicing and following up with a good collection process.

It means identifying slow-moving stock and considering whether it should be discounted for a quick sale to bring in cash.

It could mean asking creditors for a temporary extension to your payment arrangements.

Essentially, you need to be doing everything possible to increase the amount of cash coming into your business whilst slowing the outflow of cash as much as is commercially feasible. This will buy you time to reorganise the people and equipment resources needed to support your growth.

An Operational Plan Next

Secondly, you need to fix any operational problems.

Do you have all the fixed assets you need to support the level of growth being experienced? Is additional plant and equipment needed? How much will it cost, and how quickly can it be installed and operating?

Do you have road blocks in your processes and procedures that are slowing down your productive capabilities? Ask your employees about this – you might be surprised by their insight.

Do you have the right number of employees to support the new level of business activity? How long will it take to find and train new employees? Is there a need to use a labour hire company to help out on a temporary basis?

Is it possible to sub-contract out some of the work whilst your labour and equipment requirements are brought into line with the new level of business activity?

Is it possible to reschedule delivery time frames whilst these activities are undertaken?

Will the business continue to be profitable once the new resources are deployed?

A Cash Flow Forecast Last

The financial effects of the prior two steps now need to be incorporated into a cash flow forecast. It should be a weekly based forecast for the first three months, moving to a monthly based forecast for the following 9 months.

If the forecast indicates a need for additional finance you are now in a position to approach your financier with a cogent explanation of the issues you are facing, the steps being taken to rectify those issues and the short and medium term financing needs of your business.

If you can show a clear pathway out of your cash flow crisis then you have a chance that the finance needed will be approved, as it is only a temporary requirement.

If you can’t show a pathway out then you face a credibility issue with your financier – the precursor to a collapse caused by overtrading.

The Key Message

The key message for business owners (and their advisers) wanting to avoid the trap of overtrading is to plan for growth upfront, to track performance against plan, adjusting and revising the plan as dictated by the real world experience.